Indiana Law Journal
Volume 27 | Issue 4
Article 2
Summer 1952
Retail Marketing of Petroleum Products After the
Standard and Richfield Cases
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(1952) "Retail Marketing of Petroleum Products After the Standard and Richfield Cases," Indiana Law Journal: Vol. 27 : Iss. 4 , Article
2.
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NOTES
RETAIL MARKETING OF PETROLEUM PRODUCTS
AFTER THE STANDARD AND RICHFIELD. CASES
Retail Marketing of petroleum and sponsored TBA products' has
been accomplished primarily through retail stations tied exclusively to
a given oil company and selling only that company's products. 2 Competition is thus principally waged between relatively few economic units,
each of which is efficiently integrated from the oil fields down through
the retail stations. 3 The major oil companies often have preferred to
leave earmarks of independence in the operators, avoiding many ownership risks and responsibilties, 4 while exercising control over retail sales
policy by means of exclusive dealing arrangements. 5 The effectiveness
of this device has recently been jeopardized by Supreme Court decisions that full requirements contracts between the oil companies and
dealers may violate the federal antitrust laws under certain circumstances. 6 Remaining to be determined is whether the companies must
establish an employee relationship with the operators in order to utilize
them as exclusive outlets; whether such vertical integration would itself
run afoul of the antitrust laws ;7 and, finally, whether vertical integration would best serve the long-term interests of the oil companies.
1. Trade terminology for tires, batteries and accessories. Sponsored items are those
not manufactured by an oil company itself but which the company carries as its own,
often under a distinctive brand name.
2. RosTow, A NATIONAL POLICY FOR THE OIL INDUSTRY 70, 71 (1948).
3. Id. at 75.
4. Black, Exclusive Dealer Devices of Petroleum Products, 29 GEO. L.J. 429
(1940): "In any comprehensive history of government regulation of business in
America, one chapter must be reserved to relate the strange story of the ingenious
strategy of the major oil companies in marketing their products . . . whereby the
operator simulates the appearance of an independent dealer and the major producing
companies thereby acquire an exclusive outlet and attempt to evade the obligations of
chain store taxes, social security legislation, Workmen's Compensation Laws, public
liability insurance and labor troubles from attempts at unionization and collective
bargaining."
5. AMERICAN PETROLEUM INSTITUTE, PETROLEUM INDUSTRY HEAINaS BEFORE THE
TNEC, 103-114 (1942).
6. Standard Oil Co. of California v. United States, 337 U.S. 293 (1949) ; Richfield
Oil Corp. v. United States, 72 Sup. Ct. 665 (1952).
7. Of course the second problem will not arise if the oil companies are permitted
to do business through exclusive retail outlets without "legal" integration of these
outlets being required. Before the courts are faced with this problem of vertical
integration there must be (1) adverse judgments against "economically" but not
NOTES
Section 3 of the Clayton Act" is the primary obstacle to exclusive
dealing agreements. Under this Section goods may-not be leased or sold
on the condition that the vendee will refrain from dealing in the goods
of a competitior where the effect of such agreement "may be to substantially lessen competition or tend to create a monopoly in any line of
commerce." There have been three important interpretations of the
Section applicable to retail petroleum outlets.
F.T.C. v. Sinclair Refining Co.9 found no violation of the tying
agreement aspect -of Section 3 where an oil company leased gas pumps
on condition that only gas supplied by the lessor company should be
pumped therefrom, the leases to terminate upon a violation. The Court
indicated that the retail operator could purchase other pumps if he cared
to operate a split-pump station. Though the decision could be said to
conflict with the earlier United Shoe Machinery Corp. v. United States °
and the later InternationalBusiness Machines v. United States" cases,
a distinction can be made on the large portion of the entire market
2
served by those two companies.1
Twenty-six years elapsed before another important Section 3 de-
cision was made concerning the retail petroleum industry. In Standard
Oil Co. of Californiav. United States,' operators of 5,937 independent
retail outlets, constituting 16% of the retail gasoline outlets in the
western market area, signed full requirements contracts with Standard.'
4
"legally" integrated units, followed by (2) vertical integration of the retail outlets
as part of the legal entities of the oil companies.
8. 38 STAT. 731 (1914), 15 U.S.C. § 14 (1946).
9. 261 U.S. 463 (1923). Tying agreements involve leases or sales of one product,
usually patented, on condition that the lessee or vendee shall use exclusively certain
other products marketed by the lessor or vendor. Note, Tying Restrictions: Changing
Standards of Legality, 48 CoL. L. REv. 733 (1948). Distinguish these tying agreements from requirements contracts, note 14 in-fra.
10. 258 U.S. 451 (1922). The Court held illegal attempts by the shoe machinery
company to contractually bind its lessees to use only its equipment on certain manufacturing processes.
11. 298 U.S. 131 (1936). Here the Court held violative of the Clayton Act Section
3 contracts by which lessees of the defendant's machines agreed to use only the defendant's tabulation cards in the machines. An attempt was made to distinguish the
Sinclair case: "As the only use made [there] of the gasoline was to sell it, and as
there was no restraint on the purchase and sale of competing gasoline, there was no
violation of the Clayton Act." Id. at 135.
12. United Shoe controlled 95% of the business of supplying shoe machinery to
United States firms. International Business Machines made and sold 81% of the total
tabulating cards in the country. While no figures were given as to the market served
by Sinclair, it is safe to assume it was much less than these percentages.
13. 337 U.S. 293 (1949).
14. Exclusive dealing arrangements are of two primary types-tying agreements
and requirements contracts. And the requirement contracts are, in turn, subject to a
dichotomous classification. Retail level requirements contracts arise in those cases where
the subject matter of the contract will be sold by the vendee in the same form as
INDIANA LAW JOURNAL
In a five to four decision it was held that these contracts violated the
Clayton Act. The Court adopted the "quantitative test" of substantiality
of market affected, here 6.8% of the gasoline sales and 2% of the TBA
sales in the western area, thus applying to requirements contracts what
had previously been determinative of substantiality only in cases involving tying agreements. 15 The Court pointed out that since the
dealers were required to pay "going" prices to the companies, most -of
the economic utility of a bona fide requirements contract was absent.",
While other language in the case gives the impression that the Court
refused to consider the economic justification for these agreements,
previous Section 3 judicial precedent, 1t together with the fact that the
Standard contracts were inspected, dictates care in embracing language
of per se illegality in this area.' 8
received from the vendor. Manufacturing level requirements contracts involve contracts
where the product as received by the vendee enters into a process of production before
it is ready for re-sale. Retail level requirement contracts mainly assure the vendee
that he will not have to enter the unpredictable market place. But manufacturing level
requirement contracts often serve a more desirable economic purpose in that they
assure a supply of component goods when needed, facilitate budgeting, production
control, and cost accounting procedures.
15. International Salt -Co. v. United States, 332 U.S. 392 (1947). Prior to the
Intertational Salt case the "comparative" test had been applied to determine whether
there was an unreasonable lessening of competition in cases involving all alleged violations of Section 3. Under the comparative test the court examined the defendant's
share of the sectional market; if he controlled a sufficiently large proportion, then he
would be subject to close scrutiny of his actions. The quantitative test, on the other
hand, only requires that the market withdrawn from competitors be "substantial." For
a discussion of the standards applied by the courts see Comment, 49 COL. L. R-v.
241 (1949).
16. 337 U.S. 293-324 (1949). "This advantage is not conferred by Standard's
contracts, each of which provides that the price to be paid by the dealer is to be
the 'Company's posted price to its dealers generally at time and place of delivery.'"
Id. at 306 n.9.
17. Pick Mfg. Co. v. General Motors Corp., 299 U.S. 3 (1936). Here auto
manufacturers bound dealers not to sell or use in the repair of the manufacturer's
cars used parts or parts not manufactured by or authorized by the manufacturer. The
Court upheld the two lower federal courts which had' found the effect of the clause
had not been to substantially lessen competition. Despite this case, it is often said that
tying agreements are per se illegal. As to the validity of a similar contention in
regards to requirements contracts, see note 18 infra.
18. It has been argued as follows: In the International Salt case (note 15 supra)
the courts held that tying agreements were per se illegal and applied the quantitative
test of substantiality. In the Standard case the courts applied the, quantitative test
while holding the requirements contracts involved illegal. Therefore, requirements contracts are likewise illegal per se.
The non, sequitor here is partially due to the opinions of the courts. The proviso
of Section 3 is that the prohibited agreements will be illegal where the effect "may
be to substantially lessen competition." But decision after decision give the impression
that the courts have interpreted the proviso as reading "where the effect may be to
lessen competition in a substantial share of the market.".While the controlled share of
the market should probably be the principal consideration in the determination of unreasonable restraints, it should not be used as the line of legality. Such important
NOTES
A slight factual variance from the Standard case was inadequate
to circumvent the Act in Richfield Oil Corp. v. United States, recently
decided per curiam by the Supreme Court.1 9 The district court 20 held
Richfield had violated the Sherman Act Section 121 and the Clayton
Act Section 3. Richfield had sought to enforce oral exclusive dealing
arrangements by leasing stations to the operators subject to twenty-four
hour termination clauses if any provisions of the leases or the oral
agreements were violated.22 The district court said that the number of
these leased stations (1343) was "substantial" and brought the agreements within the scope of the antitrust laws; that even a tenant-at-will
was an independent businessman who bore all of the enterprise risks;
that the agreements therefore could not be said to be merely between
Richfield and itself. Hence, the agreements constituted a clear violation
of the Sherman and Clayton Acts since they had the effect of preventing the dealers from carrying products of other sellers in competition with Richfield petroleum and sponsored TBA products.
The per curiam affirmance by the Supreme Court was based on the
controlling Standard case. But while the voting alignment was 7-0, the
four judges who had dissented in the Standard case ".
.
. while adhering
variables as intent of the parties and the economic impact of the agreements should be
simultaneously considered.
The argument that this case holds that requirements contracts
(no breakdown
being made) are illegal per se is, therefore, very questionable. In fact the judgment
may not even be good authority for the contention that retail level requirement contracts are per se illegal. "It may be noted in passing that the exclusive supply provisions for tires, tubes, batteries and other accessories which are a part of some of
Standards contracts with dealers who have also agreed to purchase their requirements
of petroleum products should perhaps be considered, as a matter of classification, tying
Standard Oil Co. v. United States, 337 U.S.
rather than requirements agreement"
293 at 305 n.8.
Judgment has thus not been foreclosed on the legality of manufacturing level
requirements contracts nor on bona fide retail level requirements contracts. While all
retail level requirements might be illegal per se, at least one lower federal court
decision since the Standard Case has indicated that inquiry will be made into the
reasonableness of manufacturing level contracts. United States v. American Can Co.,
87 F. Supp. 18 (1949).
See Lockhart and Sacks, The Relevantce of Economic Factors in Determining
Whetler Exclusive Arrangements Violate Section 3 of the Clayton Act, 65 HARv. L.
REv. 913 (1952).
19. 72 Sup. Ct. 665 (1952).
20. 99 F. Supp. 280 (1951).
21. 26 STAT. 209 (1890), 15 U.S.C. § 1 (1946).
22. Actually, there were two types of stations involved in the case, dealer stations
and LO (Leased Out) stations. The dealer stations were owned by the operators and
various methods were employed to restrict them exclusively to Richfield products;
these were undoubtedly attempts to restrict independent businessmen. In the case of
the LO stations, the stations were owned or at least previously leased by Richfield. Here
the argument advanced by Richfield was that the operator-tenants were not independent
businessmen for purposes of the antitrust law and hence there could be no violation
thereof.
INDIANA LAW JOURNAL
to their views expressed in (the Standard Case) join[ed] in affirming
the judgment of the district court in this case. ' 23 Since the gist of
three of the dissents in the Standard case was that the economic impact
of the requirements contracts should have been inspected, the prior admonition regarding language of per se illegality is doubly pertinent.
Perhaps the basis of the Court's decision can be better understood by
an investigation of the economic and legal consequences of these exclusive dealing arrangements. When an oil company requires a retail
station to sell only that company's products, the station is, for the time
being, economically integrated into that particular oil company. Its sole
purpose is to serve the marketing needs of that company. At the same
time, the station is not a legally integrated component part of the oil
company-that is, there is no employer-employee relationship between
the company and the operators. The Richfield arrangements differed
from those of Standard primarily in that the Richfield operators were
tenants-at-will while the Standard operators had longer tenancies or
even owned the fee. However, in neither case did an employer-employee
relationship exist between the companies and the operators. Both situations precluded the operators being classified as anything but entrepreneurs, and a violation of the Clayton Act clearly resulted from the
exclusive dealing agreements.
Other and perhaps more promising methods of utilizing the retail
stations as exclusive outlets are, of course, potentially available to the
oil companies. Mr. Justice Douglas, dissenting in the Standard Case,
suggested that: "[t]he elimination of these requirements contracts sets
the stage for Standard and the other oil companies to build service
station empires of their own. .
. The formula [impliedly] suggested
by the court is either the use of the 'agency' device, which in practical
effect means control by the oil companies, or the outright acquisition
of them by subsidiary corporations or otherwise." 2 4 The retail operator
who buys the company products would seem to be an entrepreneur
within the meaning of the Standard and Richfield decisions regardless
of any interest he might have in the retail premises. But Mr. Justice
Douglas' predictions as to agency arrangements or -vertical integration
merit inspection to determine which method, if either, would best be
employed by the oil companies in the future.
The common law agent-for-sale is actually the alter ego of the
principal through which the principal and third parties do business.
Title to the goods involved passes directly from the principal to the
23. Richfield Oil Corp. v. United States, 72 Sup. Ct. 665 (1952).
24. Standard Oil Co. v. United States, 337 U.S. 293, 320 (1949).
NOTES
third party. 25 Attempts to control the marketing function, which would
be invalid when goods are sold to retailers, have been upheld when the
goods were consigned to agents. For example, the Dr. Miles2" case
prevented a manufacturer from controlling the retail price of an article
once it had been sold. Subsequently, the General Electric27 case upheld
retail level price control by a manufacturer where in his status as
principal he assumed all fire, flood, obsolescence and, price decline risks
and paid all necessary taxes on the goods that were consigned to agent
dealers. While the case is not directly in point as to the exclusive agency
problem, it does indicate the nature of the agency relationship and its
tentative utility in the antitrust field. Using "possessory estate" as
meaning an interest in land belonging to one who has the immediate
right to exclusive possession at a given, time,28 an analysis of this
exclusive agency potential is best made in light of two possible alternative
situations: (1) the retail station possessory estate in the company;
(2) the retail station possessory estate in the operators.
Where an oil company held the possessory estate in a bulk retail
station, stocked the shelves with merchandise, and put a commission
agent in charge of station operations, that "agent" was held to be an
.employee by the taxing authorities. 20 Under these circumstances, where
all the earmarks of an independent contractor are lacking, it is hard
to imagine a situation in which the commission man would not be held
to be an employee.3 0 Hence, an arrangement of this nature would be,
in fact, vertical integration and would raise no problem of an exclusive
agency device.
25. MECHEm, AGENCY § 48 (2d ed. 1914).
26. Dr. Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373 (1910).
27. United States v. General Electric Company, 272 U.S. 476 (1926).
28. 2 PowEvL, REAL PROPERTY § 172 (1950). "The word possessory as used in
this phrase excludes all such interests as easements, profits, restrictive covenants, other
agreements affecting the use of land, powers of appointment and rents." Ibid.
29. Hudspeth v. Esso Standard Oil Company, 170 F.2d 418 (8th Cir. 1948).
30. See National Labor Relations Board v. Hearst Publications, 322 U.S. 111
(1944). Hearst contended, inter alia, that it need not bargain with certain newsboys
since they were not "employees" within the meaning of the National Labor Relations
Act. The court replied in part: ". . . The question comes down therefore to how
much was included of the intermediate region between what is clearly and unequivocally 'employment,' by any appropriate test, and what is as clearly entreEnmeshed in such [comm6n law]
preneurial enterprise and not employment . ..
distinctions, the administration of the statute soon might become encumbered by the
same sort of technical legal refinement as has characterized the long evolution of
the employee-independent contractor dichotomy in the court for other purposes. ...
Unless the common law tests are to be imported and made exclusively controlling,
without regard to the statute's purposes, it cannot be irrelevant that'the particular
workers in these" cases are subject, as a inatter of econwmic fact, to the evils the statute
was designed to eradicate." Id. at 124-127 (emphasis supplied).
530
INDIANA LAW JOURNAL
But the contention could be made that if the oil company stocks
the retail shelves with goods in which it retains all title and risk, and
the retail possessory estate is held by the retail operator, then the company has every right to limit the operator to dealing exclusively in
the company's goods. Even though the retail operator is an independent businessman, 3 can he not contract to deal only in the company's
products when he obtains them by bailment rather than by sale? Section
3 of the Clayton Act only prevents "leases" or "sales" or "contracts
for sale" on condition, and a consignor who retains the product risks
enters into none of these relationships. There is certainly some precedent
available to sustain this contention. 2 While such arrangements would
entail large retail inventory investments by the oil companies, station
investments would be placed on the retail operators and absorption of
the operators as employees of the companies would not be necessary.
And the desired purpose of tying given retail stations exclusively to
the various oil companies would still be achieved.
But despite the aforementioned precedent, the success of such
exclusive agency relationships cannot be assured. An argument can be
advanced that the basic lesson of both the Standard and Richfield cases
is that the Clayton Act prohibits situations in which a retail operator is
simultaneously an independent businessman and an exclusive dealer.
These independent dealers are eliminated as potential customers of the
other oil companies just as effectually when they receive goods on
consignment as when they buy the goods. If the purpose of the Clayton
Act is to eliminate this type of market constriction, which market is
otherwise available to all companies on a competitive basis, then the
courts might well say that exclusive agencies are merely a subterfuge
to avoid the Act, even though the oil companies have made substantial
investments in retail inventories. 3 3 Legally-sanctioned usage of the exclusive agency device is, at any rate, doubtful. However, the oil com31. Hudspeth v. Esso Standard Oil Company, 170 F.2d 418 (8th Cir. 1948).
When Esso had been compelled to bear an employer's tax responsibilities, it leased its
bulk plant to the commission agents for one year terms; the title and risk in the
goods was retained in Esso. The court held the commission agents were independent
businessmen rather than employees and were not entitled to reinstatement by the
company under the Selective Service Act.
32. FTC v. Curtis Publishing Company, 260 U.S. 568 (1923). Here the court
upheld arrangements by which Curtis contractually prevented consignee news dealers
from selling competing publications. The court simply noted that since the contracts
were agency arrangements and not sale-upon-condition the Clayton Act did not apply.
See also Motion Picture Advertising Service Co. v. FTC., 194 F.2d 24 (5th Cir. 1952).
33. Cf. United States v. Masonite Corp., 316 U.S. 265, 280 (1942). "So far as
the Sherman Act is concerned, the result must turn not on the skill with which counsel
has manipulated the concepts of 'sale' and 'agency' but on the significance of the
business practice in terms of restraint of trade."
NOTES
panies might still achieve exclusive outlets by resorting to vertical
integration of the retail stations as bona fide legal units of the respective
companies.
The acquisition of stock or the net assets of one corporation by
another is prohibited by the Clayton Act Section 7 where the effect
may be 'to substantially lessen competition. 34 But since very few retail
outlets are corporations, since a question could be raised whether such
stations are engaged in interstate commerce, and since the capital expenditure necessary to build retail outlets is relatively insignificant,
this Section will probably not prove a serious deterrent to vertical
integration.35 Before one would advise this step, however, other areas
of the antitrust law must be inspected.
The legality of the vertical integration process of a business entity
may well depend upon the actual reasons for integration. If a business
is vertically integrated "with the deliberate calculated purchase for
control" 36 over a source of supply or a product outlet,' the attempted
vertical integration would be unlawful.7 But if the integration is in
"the normal course of business development" then the process of vertical
integration will not be per se illegal. 38
What will constitute "normal development" remains, necessarily,
uncertain. It is not the same as the "rule of reason"3 9 and is perhaps
34. 38 STAT. 731 (1914), as amended, 64 STAT. 1125 (1950), 15 U.S.C. §18
(Supp. 1951).
35.. The fact that the court would perhaps be willing to construe Section 7
liberally was indicated in United States v. Columbia Steel Co., 334 U.S. 495 (1948).
Before Section 7 had been amended to prohibit, haec verba, acquisition of assets of a
competitor, the court said: ".
.
. It must be assumed, however, that the public policy
announced by § 7 of the Clayton Act is to be taken'into consideration in determining
whether acquisition of assets of Consolidated by United States Steel with the same
economic results as the purchase of the stock violates the prohibitions of the Sherman
Act against unreasonable restraints." Id. at 507 n.7. See Comment, 46 ILL. L. REv.
444 (1951).
36. United States v. Reading Co., 253 U.S. 26 (1920).
"...
[T]his dominating
power was not obtained by normal expansion to meet the demands of a business growing
as a result of superior and enterprising management, but by deliberate, calculated purchase for control.
"That such a power, so obtained, regardless of the use made of it, constitutes a
menace to and an undue restraint upon interstate commerce, within the meaning of the
Antitrust Act, has been frequently held by this court." Id. at 57.
37. See United States v. Yellow Cab Company, 332 U.S. 218 (1947). "If that
theory [the Reading language] is borne out in this case by the evidence, coupled with
an undue restraint of interstate trade, a plain violation of the Act has occurred." Id.
at 228.
38. See United States v. Paramount Pictures, 334 U.S. 131, 173-174 (1948).
39. The "rule of reason" purports to look at the effects of an activity. Unless
the conduct involved is per se illegal, the effects must result in an unreasonable restraint of trade to be violative of the Sherman Act. Standard Oil Co. v. United States,
221 U.S. 1 (1911); United States v. American Tobacco Co., 221 U.S. 106 (1911).
But the "normal development" test is applied before the effects of an action are in-
INDIANA LAW JOURNAL
not as tenuous. It would be conceivable for the courts to establish that
some methods of development are per se illegal, as those methods forbidden by Clayton Act Section 7. In cases not involving per se illegality,
an oil company might find it difficult to explain why it purchased existing
independent stations or constructed stations alongside independent
dealers willing to handle the company's products on a competitive basis.
But where an oil company builds new stations in newly entered areas,
builds them alongside competing company's stations, or unsuccessfully
attempts to have its products marketed by independent stations, one
could hardly contend the company was not engaged in the normal
development of its business.
It would be shortsighted, however, to say that once a company
has successfully satisfied the normal development test the antitrust
law ceases to be a menace to its operation of retail outlets. The Sherman
Act Section 2,40 in addition to prohibiting "attempts to monopolize,"
also prevents "monopolization" of an industry. Early in the operation
of the Act, the United States Steel 4 1 and InternationalHarvester42- cases
established the proposition that unexerted power (bigness) is not a
per se violation of the Section, that a prerequisite for illegality is an
exercise of that power. This rationale was generally accepted and for
twenty years the assumption of its validity pervaded the language used
in antitrust cases. 43 Then in 1940 the Socony Vacuum Oil case, 44 fol-
lowing the prior Trenton Potteries case, 45 held that a combination which
controls a substantial portion of an industry and regulates prices is
illegal per se under Section 1. Later, in United States v. Aluminum Co.
of Anierica,46 the Second Circuit, in an opinion by Judge Learned Hand,
spected. The pertinent inquiry is "was this station obtained by normal expansion to
meet the demands of a business growing as a result of superior and enterprising
management" rather than "what is the effect of the acquisition of the station-does it
unreasonably restrain competition."
40. 26 STAT. 209 (1890), 15 U.S.C. §2 (1946).
41. United States v. United States Steel Corp., 251 U.S. 417 (1920).
42. United States v. International Harvester Co., 274 U.S. 693 (1927).
43. The dictum of these cases was somewhat narrowed by Mr. Justice Cardozo
in United States v. Swift and Co., 286 U.S. 106 (1932). "Mere size . . . is not an
offense against the Sherman Act unless magnified to the point at which it amounts to
a monopoly . . . but size carries with it an opportunity for abuse that is not to be
ignored when the opportunity is proved to have been utilized in the past." Id. at 116.
44. United States v. Socony Vacuum Oil Co., 310 U.S. 150 (1940).
45. United States v. Trenton Potteries Company, 273 U.S. 392 (1927).
46. 148 F.2d 416 (2d Cir. 1945). The case was decided by the court of appeals
under an expediting statute which provides for certification of a case to a court of
appeals when there is no quorum of Justices of the Supreme Court qualified to
participate in the consideration of the case and for the designation of circuit judges in
the event of disqualification from hearing the case. 58 STAT. 272 (1944), 15 U.S.C.
§ 29. (1946).
The Supreme Court endorsed the Alcoa case the following year. American Tobacco Co. v. United States, 328 U.S. 781 (1946).
NOTES
reasoned that since price fixing is illegal per se under Section 1, and
since the essence of monopolization is the power to fix prices, monopolization is illegal per se under. Section 2. The argument that power can
be a per se violation of the "monopolization" clause has found vigorous
support since this decision. 48 The pertinent problem is now the degree.
of relative size necessary before a monopolization will be found. Much
49
confusion would attend such an inquiry.
However, it is certain that the courts have generally looked to the
control exercised over a particular horizontal market only. Thus, a
dictum in United States v. Paramount Pictures, Inc.50 suggested that
vertical integration is not illdgal per se, and the Court, in determining
whether a vertically integrated unit is monopolistic will examine each
horizontal level of activity separately. If there is no monopoly at
any one horizontal level, then the inference of the Court's dictum is
that the vertically integrated unit cannot violate Section 2.
Since-there are at least twenty major oil companies and many smaller
ones, there is little probability that any one company has monopoly control at any given horizontal level. Nevertheless, it would be premature
to conclude that Section 2 will not be a barrier to expansion, of the oil
companies into the retail service station field. At least three potential
obstructions to vertical integration must be confronted: (1) some precedent indicates legislative and judicial antagonism to vertical integration; (2) the argument that disallowance of vertical integration in this
field is necessary to carry out one version of the purpose of the antitrust law; (3) the possibility of an Alcoatype analogy being used to
bring the Standard and Richfield rule within Section 2.
So far as the past is concerned, Congress has expressly prohibited
vertical integration in some areas as a matter of policy. 51 But even case
47. United States v. Aluminum Co. of America, supra note 46, at 427.
48. Rostow, M1oopoly Under the Sherman Act-Power or Purpose, 43 Ilu. L.
Rnv. 745 (1949). But see also Stevens, Monopoly or Monopolization--A Reply, 44
ILL. L. REv. 269 (1949).
49. Judge Hand himself initiated the controversy when he wrote:
"...
That
percentage [over ninety] is enough to constitute a monopoly; .it is doubtful whether
sixty or sixty-four per cent would be enough; and certainly thirty-three per cent is
not." United States v. Aluminum Company of America, 148 F.2d 416, 424 (2d Cir.
1945).
For good commentaries on the problem, see Roback, Monopoly or Competition
Through Surplus Plant Disposal: The Aluminum Case, 31 CORNELL L.Q. 302 (1946) ;
Rostow, The New Sheroan Act: A Positive Instrument of Progress, 14 U. Cnr. L.
Rav. 567 (1947).
50. 334 U.S. 131, 174 (1948).
51. 48 STAT. 162, 194, as amended, 12 U.S.C. § 78 (1946) (Banking Act of 1933);
34 STAT. 585 (1906), 49 U.S.C. § 1 (8) (1946,) (Commodities clause) ; Panama Canal
Act, 37 STAT. 566 (1912), 49 U.S.C. §5 (14) (1946). The present vitality of congressional suspicion of vertical integration is indicated by the 1950 amendment to
534
INDIANA LAW JOURNAL
law is not without its precedents which have disallowed vertical integration. In United States v. Reading Co., 52 control over railroads by coal
companies was enjoined. The Court in 1932 refused to modify a
consent decree which would have permitted a meat packer to operate
retail meat markets.5 3 While such cases are not precedent for finding
that a vertically integrated firm, as such, violates Section 2,54 the Court
did appreciate the undesirable effects of vertical integration in some
areas of the economy. Hence, one could. realistically contend that the
court should establish a bifarious standard when inspecting alleged
monopolization violations, the standard dependent upon the presence of
vertical as well as horizontal integration.
The basic question is whether the Antitrust Law only requires
the maintenance of competition, even though it be between relatively
few integrated units, or whether it seeks to preserve a system of small
competitive units in the economy. There has, of course, been much disagreement as to its purpose.5 5 But some people believe that competition
should be a dynamic concept which is not satisfied by that type of
competition that exists between a few big businesses; that smaller competitive units, where feasible, infuse their vigor into the social and
economic life of the entire community; and that the nearby retail
petroleum operator should be able to stock his shelves with those products
he considers best and upon which selection he will, in part, stand or fall
as a competitive businessman.
The Court's attitude towards vertical integration, resulting from
its resolution of these conflicting viewpoints, will probably determine
Clayton Act Section 7 which prohibits the acquisition of assets of certain going
businesses. See notes 34 and 35 supra, and text.
52. 226 U.S. 324 (1912).
53. United States v. Swift and Company, 286 U.S. 106 (1932).
54. In the Columbia Steel case the vertical integration of an independent fabricator into a subsidiary of U.S. Steel was permitted. There was held to be no
violation of Section 2. United States v. Columbia Steel Co., 334 U.S. 495 (1948).
55. "It is possible, because of its indirect social or moral effect, to prefer a system
of small producers, each dependent for his success upon his own skill and character,
to one in which the great mass of those engaged must accept the direction of a few.
The considerations, which we have suggested only as possible purposes of the act,
we think the decisions prove to have been in fact its purposes." United States v.
Aluminum Co. of America, 148 F.2d 416 at 427 (2d Cir. 1945). And see Mr. Justice
Brandeis, dissenting, in Liggett Co. v. Lee, 288 U.S. 517, 541 (1933).
But see United States v. Columbia Steel Co., 334 U.S. 495 (1948). "...
United
States Steel, despite its large sales, many acquisitions and leading position in the
industry, has declined in the proportion of rolled steel products it manufactures in
comparison with its early days. . . . Its size is impressive. Size has a significance
also in an appraisal of alleged violations of the Sherman Act. But the steel industry
is also of impressive size and the welcome westward extension of that industry requires that the existing companies go into production there or abandon that market
to other organizations." Id. at 533.
See also note 48 supra.
NOTES
whether the oil companies will be faced with an Alcoa-type analogy.
Vertical integration in this area involves the same vice as requirement
contracts which were prohibited by the Standard and Richfield cases.
Since these are per se illegal, 56 a vertically integrated concern which must
utilize, in effect, full requirement contracts among its various horizontal
units as soon as it operates, is illegal per se under Sherman Act Section
2.
5 7
Many will contend, perhaps correctly, that the oil companies need
never fear judicial interference if they vertically integrate through the
retail level. Btt some of these same people will also warn that the
companies would do most for big business by allowing the existence of
independent retailers. One scholar has recently termed the re-establish5
ment of smaller competitive units a "life factor of free enterprise."
8
It cannot be considered irrelevant that in April, 1952, the Congressional
Subcommittee on Monopoly began investigating alleged big business
monopoly effect on smaller and weaker competitors. 5°
The final result of the present retail level problem in the petroleum
industry is uncertain. The oil companies can estimate the possibilities
of different arrangements being upheld and can then attempt them or
reject them. Court review of the arrangements-whether they be exclusive agencies or vertical integrations-will determine the immediate
wisdom of the selections. Legislation will perhaps ultimately decide
their desirability. But regardless of the modus operandiof any approved
system, the companies can always compete for the retail trade on the
basis of merit. The company that can convince the public it produces
56. This is not inconsistent with the position previously taken that all require-
ment contracts are not necessarily per se illegal. Note 18 supra. For the present
argument, all that it is necessary to concede is that agreements which restrict retail
service stations to exclusive dealing with one oil company are illegal if the oil company
does a substantial amount of business. Many types of requirements contracts are naturally unaffected by this position.
57. In the Alcoa case, the court first established that Alcoa monopolized and then
applied the price-fixing analogy in order to hold a monopoly per se illegal. Where a
firm is vertically integrated but does not control an adequate horizontal level of the
market to be guilty of a conventional monopoly, see note 49 supra, it will be contended
Section 2 is an inadequate sanction. But this note has attempted to indicate that conventional usages of "monopolize" will perhaps be adapted to what some believe is the
purpose of the Sherman Act. Few have ever contended that the Act was ever intended
to be construed by strict application of economic terminology. Application of the
described dichotomy would make Section 2 a potent instrument. See Rostow, supra
note 49.
Of course Section 1 is also available; the integrated business could be said to be
a ". . . combination in the form of trust or otherwise . . . in restraint of trade.
26 STAT. 209 (1890), 15 U.S.C. § 1 (1946).
58. Dimocx, FREE ENITEPRISE AND THE ADmiNIST A vE STATE 1-40 (1951).
59. N.Y. Times, April 14, 1952, p.32, col. 2. One of the three stated purposes of
the investigation is specifically ". , . whether the [antitrust] laws are tough enough,"
INDIANA LAW JOURNAL
the best products, guarantees fair dealing and offers the best facilities
for the public comfort will benefit. The companies will still be able to
train retail dealers in courtesy and efficiency. But instead of compulsion
being the sanction for the continuance of the relationship, the oil companies will compete vigorously for the business of the retail operators.
And the resultant smaller competitive unit at the retail level could establish a type of competition that some have implied is inconsistent with
our ologopolistic economy. 60 For those who believe our free enterprise
system is adaptive enough to allow the co-existence of efficient bigness,
where necessary, and individualistic smallness, the result would be
eminently satisfactory.
THE DIRECTED VERDICT AND APPLICABILITY OF
STATE PROCEDURAL RULES IN FELA CASES:
THE ROLE OF THE SUPREME COURT
Implicit in the scheme of concurrent enforcement of national legislative enactments by state and federal courts is the question of the
proper procedural rules to be observed in the state forum. A serious
contention has been that the state's interest in administering its own
judicial system is so significant that local rules of pleading and practice
must be applied even at the sacrifice of legitimate claims arising under
federal law.1 Adequate appraisal of the validity of this argument must
60. Marxists have long embraced the theory that concentration is an inevitable
result of the capitalistic system. See SCHUMPETER, CAPITALISM, SOCIALIS-, AND
DEMOCRACY 34 (2d ed. 1947).
Today this Marxian theory has been augmented, strangely enough, by those who
contend that there exists an economic and technological necessity for bigness in today's
industry. See Charles E. Wilson, Big Business and Big ProgressGo Together (Privately
Printed Brochure 1949) ; DRUCKER, CONCEPT OF THE CORPORATION 224 (1946).
1. The most important legal problem confronting our jurisprudential system is
that inherent in the co-existence of national and state governments. Solution of the
really significant social problems forced upon us by the interdependence of modern institutions requires a constant adjustment in this relationship. During the upheaval of
the 1930's this truism was mirrored in the controversy over the limits of federal power
under the commerce clause. Since this provision was found to be substantially co-extensive with national requirements, the problem is now focused in the extent of state power
to tax and to regulate economic activity. Yet the limits of federal authority are still
being probed with reference to the explosive issues of protection against state abuses of
the criminal processes and of the other numerous safeguards, embodied in the 14th
Amendment, against unjust state action.
Hardship resulting from arbitrary exercise of power by a strong central government provides the historical justification for our federal system; to allay the popular fear
of tyranny caused by such centralized authority, our Federal Constitution created
a national government with expressly limited powers. Nevertheless, as the United
States grew geographically and industrially the functions of the national government